The Canadian dollar has shown some strength of late, but is falling again on oil prices. Is the end of suffering nigh for the loonie? The team at BTMU explains:
Here is their view, courtesy of eFXnews:
The performance of the Canadian dollar was all about two factors in January – the price action in the crude oil market and the Bank of Canada monetary policy decision, notes Bank of Tokyo-Mitsubishi UFJ (BTMU).
“January basically continued from where we left off in December for crude oil with the December price drop of 11% followed by a further plunge of 28% through to 20th January before undergoing recovery. The scale of that plunge through to 20th January fuelled heavy CAD selling with USD/CAD hitting an intra-day high of 1.4690, also on 20th Jan,” BTMU adds.
“The recovery in crude oil since then that helped support CAD was reinforced by the decision of the BoC to refrain from easing its monetary stance further, contrary to market expectations. Given the renewed plunge in oil that decision surprised us and the risk remains that the BoC will be forced into additional easing over the coming months. While the Monetary Policy Report included a sharp downgrade to real GDP growth this year from 2.0% to 1.4%, the BoC was mindful of further falls in CAD and the impact that might have on inflation expectations given expectations were well anchored at around 2.0%. The BoC also incorporated a risk from fiscal stimulus with the new government expected to implement stimulus in the budget announced in March,” BTMU argues.
“Given we expect crude oil to bottom in the current quarter, we are maintaining our view of gradual CAD recovery beyond this quarter through to year-end,” BTMU projects.
BTMU targets USD/CAD at at 1.37 by end of Q3 and at 1.33 by end of the year.
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